Advanced Guide to

Forex News Trading

By David Song, Currency Analyst for DailyFX.com

[email protected] & http://www.Twitter.com/DavidJSong

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Part II: ‘Trade the News’ Strategy

The ‘Trade the News’ Strategy

With the basics covered, we will outline a simple strategy that can be tailored to meet different market
conditions as well as the various styles of trading. This is the strategy we will play SHOULD we see a
confirmed move in the price action following the release.

1. Select the Currency Pair

Before thinking about entering a news trade, we need to consider which currency pair could be most
clearly affected by a specific news release. It’s clear that the home currency of a news release should
be in that pair; e.g. the US Dollar would be affected by US labor market data. Yet picking its
counterpart is likewise significant.

There’s no exact formula, and that is why we actively discuss currency pair selection for various news
trades in our regular “Trading the News” report on DailyFX.com. You can always find a top
marketmoving event on the DailyFX Briefings page.

2. Is the News Better or Worse Than Forecast?

Once we pick our currency pair, we need to know whether the news is better or worse than expected.
Many times it can be straightforward: a stronger employment gain should boost the domestic
currency. Yet it’s important to note that context is everything, and indeed we focus on that same topic
in our “Trading the News” report.

3. If the news is better, did the currency rally? If it was worse did traders confirm by sending it lower?

Before initiating a position, we want confirmation as well as conviction to take a trade. With that said,
we should gauge if the market reaction makes sense (positive US data should be bullish for the dollar),
and need to see follow-through behind the initial move in order to trigger a trade.

Prior to the data print, we want to look at price action on a short-term time frame (5, 10, 15 minute
charts), and use the closing prices following the release to dictate whether or not we should even
trade the event risk at hand.

4. Remain able to enter the trade with two units

If there is a meaningful market reaction, we may enter a position with two small units when trading
the news. As we play the short-term volatility that follows a news release, we want to be able to close
the trade at gains when we can, while leaving some of our exposure on the table in order to soak in
any additional advances that may come about as the day progresses.

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5. Place Initial Stop for Both Lots

Given the risk of seeing choppy/ whipsaw-like prices following a major development, we ALWAYS want
to set an initial stop for both positions in an effort to preserve our capital. Often, the major currencies
tend to track sideways ahead of key events, and we like to set our stops above or below the range, as
we anticipate a large move in one direction. Although this approach requires putting additional pips on
the line, it may help avoid getting stopped out too early in the game and should help to identify a
directional bias following the initial noise subsequent to the release.

6. Set Target for First Lot, Open Objective for Second Lot

In order to maximize our potential for success, we set a reasonable target for our first position but
keep an open objective for the second lot, in the case the market reaction gathers pace throughout the
trading session. By taking this approach, we are able to take advantage of the initial move following
the event risk. We will likewise have an opportunity to maintain a small exposure should the pair at
hand continue to move in our favor.

7. Move Stop on Second Lot When First Trade Reaches Mark

After hitting our initial target on our first position, we want to move the stop on the remaining lot to
breakeven in an effort to preserve our profit. Given that we can’t realistically know how far a currency
pair will move, we’ll allow the outstanding position to run once we’ve secured the first trade.

8. Use Discretion for Second Target

As we’re still left with a smaller exposure, we want to use our best discretion in managing the trade;
we should look for a reasonable target to book our remaining position. Since we’ve already moved the
stop to cost, implementing this strategy would allow us to soak in at least the gains from the first trade
even in the worst-case scenario.

Real World Example:

Figure 1 EUR/USD 5-Minute Chart

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To put our strategy to work, let’s get into a real world example, where we will take a look at the
market reaction to U.S. Non-Farm Payrolls report—historically one of the most market-moving events
for major currencies. Going into the event, the Non-Farm Payrolls forecast sat at 115K, but it’s the
deviation from market expectations that tends to produce increased volatility for a given data print.

Prior to the release, the EURUSD has traded within a relatively tight range, and we will use the
sideways price action to trigger a trade, once we see a meaningful move in the exchange rate. Should
we see a muted response, where the EURUSD preserves the range-bound price action following the
release, the lack of a clear direction bias will keep us on the sidelines, as we look to preserve our
capital.

Figure 2 EUR/USD 5-MinuteChart

Once the data print crossed the wires, we saw a spike in the EURUSD, as NFPs grew 114K amid
forecasts for a 115K print and fell short of market expectations. However, the initial reaction quickly
tapered off as the 5-minute candle closed back within the range. In turn, we were left on the sidelines
and would need a more meaningful move to put us into a trade; the pair failed to close above the
range.

Figure 3 EUR/USD 5-Minute Chart

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Although the initial reaction fell short of triggering a potential trade, the next 5-minute candle on
EURUSD closed above the range and gave us a trigger that we might enter a long EURUSD trade. As we
anticipate further gains, we want to start thinking of a potential trade setup that fits the short-term
volatility.

We would place the entry by the high of the candle that closed above the range as we look for a bullish
break, and want to implement at least a 1:1 risk-to-reward ratio for the short-term position.
In turn, we would set a buy entry up at the 1.3020 figure and a relatively tight stop at 1.2995 (below
the range to avoid getting stopped out of the trade prematurely).

Figure 4 EUR/USD 5-Minute Chart

With our stop in place, we want AT LEAST a 1:1 risk-to-reward ratio; we will always risk at most what
we stand to gain. This sets our initial target at 1.3045. Remember, we’ve set the stops on both lots at
1.2995 to limit our losses, but we only placed a limit order on one of the lots. We will let the trade pan
out as we have our stops and a limit in place.

Figure 5 EUR/USD 5-Minute Chart

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As we maintain our trade throughout the day, our first objective at 1.3045 gets triggered. We’re still
left with a small exposure on the EURUSD, and we can move the stop on the remaining position to cost
(1.3020) in order to protect the gains we were able to pick-up following the initial reaction. At this
juncture, any further advances in the EURUSD could further add to potential gains.

Options for when to close the second lot include manually moving the stop higher with additional
gains, looking for a resistance point higher than the first target to place a second limit order, or setting
a trailing stop that automatically rises with further gains.

Trade the News Overview:

Now that we’ve gone through the strategy, here’s a basic checklist that should help avoid getting
caught on the wrong side of the market following a news event.

• Does the Market Reaction Make Sense? (Bullish/Bearish Based on Market

Expectation/Forecast)

• Wait for News/Noise to Feed Through

• Is The Event Worth Trading? (Risk vs. Reward)

• Look for Confirmation & Follow-Through Behind the Initial Reaction

• Identify Appropriate Stops/Limits

Ready to put your new knowledge to work?

TRADE YOUR DEMO ACCOUNT.

When you signed up for this forecast, you received a free practice trading account. Try placing trades
in your practice account with the help of resources like this trading forecast, DailyFX.com, DailyFX Plus,
and DailyFX live webinars.

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High Risk Investment

Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all
investors. The high degree of leverage can work against you as well as for you. Before deciding to trade
foreign exchange you should carefully consider your investment objectives, level of experience, and
risk appetite. The possibility exists that you could sustain losses in excess of your initial investment.
You should be aware of all the risks associated with foreign exchange trading, and seek advice from an
independent financial advisor if you have any doubts.

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